‘Overtrading leads to losses’: Zerodha's Nithin Kamath announces virtual contract note; all about it

Zerodha CEO Nithin Kamath on Tuesday said that overtrading is one of the biggest reasons why trader lose money in stock market. While low brokerage costs may entice investors to trade more, Kamath emphasised that increased trading raises the probability of incurring losses.

"Overtrading is one of the biggest reasons why traders lose money. It might sound weird coming from me, but low brokerage costs can trigger people to trade more,” Kamath said on Twitter

Although the brokerage costs for each order are limited, additional charges such as Securities Transaction Tax (STT), exchange transaction charges, stamp duty, and impact costs are levied as a percentage of turnover. These charges can escalate exponentially with the volume of trades conducted.

To address this issue, Zerodha has introduced a virtual contract note, which Kamath hopes will act as a deterrent. This note provides traders with a comprehensive view of the charges associated with all the orders placed during the day.

In a recent move, the market regulator Securities and Exchange Board of India (SEBI) mandated all brokers to display charges upfront while placing an order, enabling traders and investors to estimate the expenses they will incur. While this proves useful for those placing fewer orders, it falls short for traders who engage in frequent trading throughout the day, as the displayed charges pertain only to individual orders.

To cater to this group of traders, Zerodha's virtual contract note displays the charges for all orders placed during market hours. Investors can access the virtual contract note in the Orders tab on the market-oriented social media site Kite. It provides a breakdown of brokerage charges, STT, exchange transaction charges, stamp duty, SEBI turnover charge, and Goods and Services Tax (GST) for orders placed during the day, offering a transparent overview of the costs incurred.

It provides a breakdown of brokerage charges, STT, exchange transaction charges, stamp duty, SEBi turnover charge and Goods and Services Tax (GST) for orders placed during the day. Offering a transparent overview of the costs incurred.

Currently, this feature is available on the web version and will soon be introduced on the Zerodha app as well.

Computation of charges

According to Zerodha’s website, the charges displayed are determined based on the trades rather than the product type, such as Margin Intraday Square-off (MIS) or Cash and Carry (CNC).

Zerodha employs the FIFO (First In, First Out) method to differentiate between intraday and delivery trades.

This is particularly relevant for equity trading, as brokerage and Securities Transaction Tax (STT) vary based on the trade type. As a result, the displayed charges can decrease if an existing position is closed, causing a delivery trade to be treated as an intraday trade. However, this distinction does not apply to Futures and Options (F&O) trades, as the charges remain the same for both intraday and overnight positions.

For example, consider a scenario where a buy CNC order for Reliance is placed, followed by a sell MIS order for the same stock. These orders will be offset against each other, and the charges will be calculated as per intraday trades.

If the MIS position is subsequently squared off, all MIS orders will be netted off, treating them as intraday trades, while the initial buy CNC order will be considered a delivery trade, with charges applicable accordingly.

For segments such as Equity F&O, Currency F&O, and Commodity F&O, the computation remains consistent regardless of whether it is an intraday or overnight trade.

By providing traders with visibility of charges for all their trades during market hours, Zerodha aims to help prevent overtrading when situations deviate from the planned strategy.

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